Selective Myopia: A Comparison of Analysts' Reactions to Incumbent and Non-Incumbent Responses to Technological Change

Abstract

We explore the reactions of securities analysts - as important sources of institutional pressures for firms - to similar strategies undertaken by two different groups of firms responding to a radical technological change. We study the advent of voice over Internet protocol (VoIP) technology in the wireline telecommunications services industry and compare analysts' reactions to similar strategies pursued by incumbent firms (wireline telecom firms) and non-incumbent entrants diversifying from other industries (cable television firms) between 2002 and 2007. In our study of the texts of hundreds of analysts' reports, we first find that analysts were more attentive to firms' strategies to respond when covering the non-incumbent cable entrants than in reports on the incumbent firms, and second, that analysts were more positive toward the cable firms' strategies to respond to the new technology than to similar strategies undertaken by the incumbent phone companies. These findings contribute to the literature on the challenges of technological change. It may be that the reactions from securities analysts and financial markets create additional disadvantages for incumbent firms responding to technological change, while legitimating and enabling the similar responses of new competitors.